2 Rivers Strategy
By Frederic Palmliden, CMT
Senior Market Technician, TradeStation Labs
Accounting for volatility helps filter unwanted signals from a trend-following system, since highly volatile markets are partially to blame for whipsaws in such trading systems. A two-moving-average-cross system can partially account for volatility by varying the width of its lines depending on the standard deviation of the security’s prices over the time period used by the moving averages. Fewer and more reliable signals are thus generated. Bands with dynamic widths are then created, which resemble two rivers. The smallest river needs to entirely clear the larger river in order for a signal to be generated. Moreover, a scaling-out approach is used in order to take partial profits and fight the tendency of this type of system to give back open profit until the system reverses. The 2 Rivers Strategy follows the same general philosophy of the Conditional XMA Strategy (available in the TradeStation Labs Analysis Concepts Archive folder)-to avoid or help eliminate whipsaws and hold on to open profit more efficiently than a traditional two-moving-average-cross system.
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